LegalEASE: Notes from the Experts – Equivalency Determination Validity Period

As we embark on the start of a new year, many of us at NGOsource are reflecting on the significance of the past year and looking optimistically toward the new year.  We're also thinking about how a new year will impact the Equivalency Determination (ED) validity period. The ED validity period, dictated by U.S. tax law, indicates when a private foundation or donor advised fund (a “grantmaker”) can rely on the written advice provided in the ED. The validity period of an ED is based on an organization’s fiscal year.

What is a fiscal year?

A fiscal year is an annual accounting period for keeping records and reporting income and expenses. An organization’s fiscal year-end can coincide with the calendar year or any other period of 12 consecutive months. In the U.S., the fiscal year corresponds to the year on which the fiscal year ends. So, a fiscal year starting July 1, 2017, and ending June 30, 2018, is referred to as the “2018 fiscal year.” 

How is the validity period calculated?

Internal Revenue Service (IRS) guidance provides that a grantmaker’s treatment of a non-U.S. organization as equivalent to a U.S. public charity “ordinarily will be considered made in good faith if it is based on written advice that is ‘current.’” Rev. Proc. 2017-53. Written advice is considered “current” for a “period of up to two years after the advice is provided.” Id.    

According to the Treasury Regulations,

“written advice will be considered current if, as of the date of distribution, the relevant law on which the advice is based has not changed since the date of the written advice and the factual information on which the advice is based is from the donee's current or prior taxable year (or annual accounting period if the donee does not have a taxable year for United States federal tax purposes).”

—Treas. Reg. § 53.4942(a)-3.

Furthermore,

“[w]ritten advice that a grantee met the public support test … for a test period of five years will be treated as current for purposes of grant payments to the grantee during the two taxable years (or, as applicable, annual accounting periods) of the grantee immediately following the end of the five-year test period.”

—Id.

In other words, a grantmaker can rely on the written advice in an ED for a period of two years following the last fiscal year for which financials are reviewed, as long as there are no changes to the relevant laws or material facts on which the written advice is based. So, for example, if an organization with a fiscal year-end date of December 31 provides financials through December 31, 2017, the validity period, assuming no changes to the law or material facts, would extend to December 31, 2019.

What if financial information is not required?

As noted in previous posts, some organizations qualify as public charities (or their equivalents) based on the nature of their activities, not on an evaluation of their public support. In this case, the validity period of the ED will only be based on the organization’s most recently completed fiscal year. For example, if a public university has a fiscal year-end of July 31, and the ED opinion is issued on August 1, 2018, then the validity period, assuming no changes to the law or material facts, would extend to July 31, 2020. 

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This article is for general informational purposes only and does not represent legal advice as to any particular set of facts. Please seek legal counsel as you deem necessary.